Accounting Tips for Yoga Teachers: Tax Benefits Associated with Being an Independent Contractor

Yoga studios can hire yoga teachers either as employees or as independent contractors. Basically, businesses (including yoga studios) that hire employees are responsible for withholding a portion of salary to pay the employees’ federal and state taxes, including income taxes, Social Security, Medicare taxes, and unemployment tax.

Independent contractors are responsible for paying their own taxes, relieving the employer of the legal obligation to withhold salary toward tax payments. For this reason, it’s generally easier for the yoga teacherparticularly one teaching in multiple studiosto function as an independent contractor. In addition, as we’ll discuss below, being considered an independent contractor can have significant tax advantages for yoga teachers.

Are You an Employee or an Independent?
What determines whether someone is an “employee” or an “independent contractor”? For tax purposes, the determining factor is how the U.S. Internal Revenue Service classifies the arrangement.

The IRS uses the classic “right of control” test to determine whether someone is an employee or independent contractor. Workers are considered employees if those hiring them for have the right to direct and control the way workers accomplish their tasks. Independent contractors, on the other hand, control the details of their work. In other words, when the hiring firm controls or directs not only the result of the work, but also the means and methods used to achieve those results, then the worker is considered an employee; when the hiring firm sets the desired result but leaves the means and methods to the worker’s discretion, then the worker is considered an independent contractor.

For example, in a typical scenario, a yoga studio may hire a particular yoga teacher to teach two Ashtanga Yoga classes and one restorative class per week at specified times, but let the teacher control and direct the sequence of poses, the pacing, the exact verbalization of instructions and suggestions, the nature of adjustments, any readings during the class, and all other specified elements that make up an individualized class. This example makes it clear that the yoga teacher is likely to be considered an independent contractor.

The line between controlling and directing the result, and controlling and directing the means and methods, is not always so clear. Yoga studios, like other businesses, may have varying levels of control and direction.

How It Works
To help business owners and workers understand their legal obligations, the IRS specifies numerous factors that constitute right of control and direction over the worker’s means and methods.

For an independent contractor, these factors include analyzing whether the worker furnishes the tools and materials needed to do the work, pays his or her own business and traveling expenses, sets his or her own working hours, or works for more than one firm at a time. Defining factors for an employee include whether the worker is told in what sequence or order to work by the hiring firm, works full-time for the hiring firm, provides regular oral or written progress reports to the hiring firm, or provides services that are an integral part of the hiring firm’s day-to-day operations.

Thus, for example, a yoga teacher who brings his or her own props, travels from studio to studio, pays his or her own travel and other business expenses, and is paid on an hourly or per-class basis according to his or her own constantly changing schedule, would likely be considered an independent contractor. On the other hand, Studio X’s “master teacher,” who fills regular classes, teaches them in the manner prescribed by the studio, relies on the studio’s props, is slated to teach a particular style of yoga for a lengthy (i.e., a year) or indefinite period, meets with the studio owner regularly to provide feedback on progress, and is considered an integral part of the studio’s daily operations, would likely be considered an employee of that studio.

Yoga teachers should understand these distinctions, because even if the contract between studio and teacher specifies that the yoga teacher is an “employee” or “independent contractor,” the IRS will look beyond the words of the contract to the actual arrangement. As for yoga studios, an employer that misclassifies an employee as an independent contractor may be held liable for employment taxes for that worker, plus a penalty.

The Tax Breaks
Being an independent contractor not only increases flexibility and control; it also has some tax advantages.

As an independent contractor, you can deduct from your taxable income any necessary expenses related to your business. According to the IRS, a “business expense,” to be deductible, must be “both ordinary and necessary.” An “ordinary expense” is one that is common and accepted in your industry. A “necessary expense” is one that is helpful and appropriate for your trade or business. For example, if you use wood or foam blocks as props, the cost of these props would likely qualify as a deductible business expense; so too would your yoga mat, folding chairs, blankets, and straps.

Here are some major categories of potentially deductible business expenses:

Business Use of Home: The IRS allows deductions for business use of part of one’s home. Deductions include a percentage of rent, utilities, home insurance, depreciation, mortgage interest, real estate taxes, and repairs and improvements relating to the part of the home used for business. To qualify for the deduction, the IRS requires that you regularly use this part of the home exclusively for a trade or business, and that at least one of the following is met: (a) you use the business part of your home as your principal place of business; (b) you meet patients, clients, or customers (i.e., yoga privates) there; or (c) you use a separate structure on your property exclusively for business purposes. Under this test, your home office qualifies as your principal place of business if you use the office exclusively and regularly for administrative or management activities of your trade or business and have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Making calls, sending faxes and emails, and doing paperwork from a portion of your home to set up yoga teaching assignments and contracts would likely meet this definition.

Business Use of Car: Business use of your car to travel to and from the yoga studio may also qualify, at least in part. IRS rules provide that if you use your car exclusively in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you may only deduct the cost of its business use.

Business Travel Expenses: The IRS defines “business travel expenses” as “the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” According to the IRS, you are traveling away from home if your duties require you to be away from the general area of your tax home (the city or general area where you work) for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away. Yoga teachers who travel to give workshops in distant cities would likely qualify for this deduction.

Meals and Entertainment: The IRS allows you to deduct the cost of meals in either of the following two situations: (1) it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business; or (2) the meal is business-related entertainment. If you discuss your contract over a vegetarian dinner, that may be deductible. However, IRS rules limit the amount one may claim for meals and entertainment.

Additional business expenses, such as dues and publications, would probably qualify for deduction (for example, your Yoga Journal subscription can likely be deducted). Offices expenses and expenses for legal and professional services (including professional liability insurance) also should be deductible business expenses. On the other hand, fancy yoga outfits and other items of clothing generally are not deductible.
In sum, the tax advantages available to independent contractors are considerable. In addition, independent contractors set their own wages and therefore may earn more than they would as employees.

Be sure to consult an accountant or tax attorney at tax time to discuss your unique deductions and to address nested exceptions within IRS rules.

Michael H. Cohen, J.D., M.B.A. is Principal in the Law Offices of Michael H. Cohen and the publisher of the Complementary and Alternative Medicine Law Blog (www.camlawblog.com). The materials in this website/e-newsletter have been prepared by Michael H. Cohen, J.D., M.B.A., and Yoga Journal for informational purposes only and are not legal opinion or advice. Online readers should not act upon this information without seeking professional legal counsel.